VENEZUELA'S NEW BOLĂ?VAR

January 4, 2008

Venezuela's revamped and renamed currency, the "bolívar fuerte" (strong bolivar), made its debut with the New Year, in a move designed not only to simplify transactions but also to tame high inflation. The former objective will be met, as the redenominated currency will have three fewer zeroes. The latter goal will not be achievable unless the government of President Hugo Chávez makes significant fiscal and other policy adjustments to address strengthening inflationary pressures. The chances of it doing so over the next year are poor, says the Economist.

Consider:

The bolívar fuerte is valued at a fixed official rate of Bs2.15:US$1, versus Bs2,150:US$1 for the older currency.

However, the dollar costs more than double that on the black exchange market, where the current rate is around Bs5.70:US$1.

The growing gap between the two markets is attributable to government exchange controls on access to foreign currency, in place since early 2003, combined with expanding liquidity and growing demand for foreign exchange for imports. Investors, wary of the government's interventionist economic policies, also have been dumping the local currency. The official rate, which has not been changed since 2005, is considered to be at least 20-30 percent overvalued.

These factors are among those that have also fuelled soaring inflation, which reached 22.5 percent year on year in December 2007 -- the fastest pace in five years -- according to newly released Central Bank figures.

This rate compares with 17 percent inflation in full-year 2006 and was substantially above the government's target of 12 percent.

It was the highest rate of inflation for any Latin American country last year.